It’s easy to make money in the stock market. You buy a broad-based index fund, you leave your money there for 10 years or more, and you are practically guaranteed to do better than holding cash, bonds, real estate, or any other investment.
But, If it is that easy why doesn’t everyone do it?
The sad truth is that millions of smart people lose money in the stock market.
Here is how I break down who wins and lose money in the stock market.
Know-noting about the market.
If you know nothing about the market, but someone guides you towards index funds. You buy your index funds and do nothing for more than 10 years. You will make good money in the stock market. More money than most professionals.
I have coached and guided a few of my know-nothing-about-the-market clients into index funds and they are doing quite well, better than most of my friends who watch the market every day
The Know-everything about the market
This is the person who have read a few investors books, have watched a few tv show, follow other traders on the internet, and listen to investors podcast. This person has been lead to believe that if they do their homework, and that if they have a true conviction on what they do, they will be able to do better than the index.
This person will either lose money, or drastically under perform the market. I will explain in the rest of the article.
The person who embraces index investing
This person had either good guidance right from the start, or have gone through the painful process of making many mistakes and have realized that index investing is the surest and more efficient way to make money in the market.
For the rest of this article, we will focus on the second group, the Know-everything about the market group.
Why so many millions of people lose money on the market
1. Panic buying and selling
It’s a natural tendency. People buy stocks when they see them going up. The problem is that when they notice a stock going up, it’s often too late. Most of the upward movement has been done, the residual gain is not that great. Many times, people buy near the top.
One of my friends was sucked in by the Bitcoin frenzy, he bought Bitcoin at almost $20,000 now, Bitcoin is under $4,000
Conversely, people tend to sell when they see the market going down. The crucial part is that they don’t see the market going down at the beginning stage, they see the market going after it has had a significant drop or it has been going down for a long time, at that point, it’s too late if they sell they will be taking significant loses.
2. Buy/Selling individual stocks
We are seduced by the lottery mentality. Facebook, Apple, Amazon, Google… If anyone of us would have invested in any of these high-flyer stocks, and held our positions, we would be millionaires. The problem is that, like winning the lottery, we don’t know which stock will be the big winner of the next 10 years.
But we are seduced by the euphoria, the frenzy of the new thing. The stocks that all the news channels are talking about. That’s it! That must be the winner, and occasionally it is, but no one knows which one.
Another big problem with individual stocks is that anyone of them, no matter how safe and secured they seem to be, all of them can go to zero. We have seen it many times.
3. Picking Rock Star mutual fund managers
Here is the thing: if a mutual fund manager is so great, he wouldn’t be an employee, he would be managing his own money. Think about how nice it would be for a rock star mutual fund manager not to have to deal with all the rules and regulation of managing other people’s money, without having to deal with sales departments, investors, the boss, the colleagues, the commuting, and all the unpleasantness of having a full-time job.
The truth is that all mutual fund managers are employees who do as much as they can, but they are so insecure of their own performance that they rather have a regular paycheck than being on their own.
If anyone takes a look at the SPIVA report, they will soon realize that about 75% of mutual fund managers don’t beat the index. However, all individual managed funds will charge you a high fee.
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